Gas Pressure on Investors

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Sep 13, 2014

Consumer’s delight has always been the pain of investors. Promotional pricing means good news for consumers as they can bag in more for less money however on the other hand it reduces the margin of the company which results in fall of earning per share consequently share price taking a hit. Diners love Olive Garden’s unlimited breadsticks, but according to an investor, the Italian chain’s parent company, Darden Restaurants, needs to cut back on the carb fest in order to reach peak profitability. Thus it proves that the joy of the two sides of the business the consumer and the investor are inversely proportional.

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The shares of Exxon Mobil Corporation (XOM, Financial) and Chevron Corp. (CVX, Financial) are also somewhat headed in the same downward direction as the investor’ joy. Let’s take a better look at what is happening in the world of gas prices.

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Falling Gas prices is it a relief or a pain???

Falling gas prices are bringing smiles to myriads of consumers but at the same time burning a hole in the pockets of the investors. In a new energy outlook report, the U.S. Energy Information Administration said this week that gas prices, which fell to an average of $3.49 per gallon in August (12 cents lower than the July average and 21 cents under June’s average), are poised to continue their downward trend and will hit an average of $3.18 per gallon by December, the lowest monthly average since January 2011.The EIA has also declared that there are significant pricing differences across regions, with monthly average prices in some areas falling above or below the national average price by 30 cents per gallon or more.

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GasBuddy.com a gas tracking site has also predicted that the gas prices are on its journey downhill and will dip below $3 per gallon by December 2014 for the first time in nearly four years. The $3 per gallon price mark might be reached sooner than December by certain parts of the company. Currently the residents of Roanoke, Virginia enjoy the competitive gas price at $3.75 per gallon and the price in Spartanburg, South Carolina stands at $3.85.

Such fall in price is due to the fall in crude (CLV4, Financial) prices and better supply chain. The crude price has seen a steep dip of 12% lower price as compared to their prices in June. Furthermore prices of Crude futures closed at $92.08 on Friday, an 0.8% decline for the day. With the rise in supply of crude it has become increasingly difficult to hold on to the prices and hence it has stated seeing a quick slip. According to the EIA estimates U.S. crude production averaged at 8.6 million barrels a day in August, the highest monthly production since July of 1986. However with the advent of the latest automobile technology and added focus on emission norms and fuel efficiency of cars, the demand for crude has weakened considerably.

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In the words of EIA as published in a press release earlier this week, they said “As new cars replace less-efficient older cars, the increase in the average fleet fuel economy is expected to outpace the growth in the driving age population and vehicle miles traveled and put continuing downward pressure on gasoline consumption.”

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Another Energy analysis by Citi research analyst, Seth Kleinman, expressed that the global crude market is oversupplied by 400,000 barrels of oil a day, and adding oil products to the market only doubles this oversupply which could lead to adding to the blues of the oil companies. Now that the Libyan crude export counter has regained life, with production reportedly up to 725,000 barrels per day despite the domestic turmoil and Iranian exports standing steady at around 1 million barrels per day, it is evident that the global market is flooded by crude supply which is affecting the price downhill. Kleinman also wrote that if the demand stays at their current level and does not see a sudden rise the pressure on OPEC will rise to slow down production and exports.

Oil Companies in the Gas Pressure Canister

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Due to the weakening demand of the crude energy sector stocks have seen the downside this week by 0.5%. The effect of this pressure is more drastic on oil company giants like Exxon Mobil and Chevron. While the share prices of Exxon Mobil has dropped by 2.5% since the start of this week Chevron is the worst hit oil company trailing its peer at a drop of 2.7% since beginning of this week. In the Friday trading session the stocks of Exxon Mobil and Chevron were among the Dow Jones’ biggest laggard performers. In the Friday session alone the price of Chevron plummeted by 1.08% and price of Exxon climbed down by 1.22% after the news flash that the current sanctions on Russia could adversely affect its arctic drilling project worth $500billion with one of Russia’s largest oil companies. Meanwhile, the United States Oil ETF is stood flat for the week moving up by 0.03% but also came down a little more than 1% in Friday afternoon trading session.

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How to Handle this Crude Pressure???

As a wise individual investor or analyst it would be best to hold on to our current positions in these oil companies till the time is ripe with growing demands also at these prices it would be quite lucrative to buy in a few more positions. Simultaneously it would be wise to en-cash on this downtrend opportunity by playing short on these stocks and trading in the put options of these oil company stocks with adequate risk hedging.